Abstract: I examine the bank credit supply and industry growth effects stemming from the introduction of bank account debit (BAD) taxes using a sample of Latin American countries between 1986 and 2005. I exploit a key channel through which BAD taxes affect the supply of credit: their introduction creates a strong incentive to shift away from holding bank deposits and into using cash. I find that this higher preference for cash results in a lower availability of deposits as a source of funding for banks, and that this in turn is directly related to a lower provision of bank credit to the private sector. Furthermore, using a differences-in-differences empirical strategy, I find that this lower availability of credit ultimately affects economic growth at the industry level, mainly by reducing the growth prospects of industries that are more dependent on external finance or that have less tangible assets.

Abstract: AWe study the effect of sovereign credit risk on firm investment and financial policy. We use the differential effect of sovereign downgrades on the ratings of firms at the sovereign bound versus firms below the bound due to sovereign ceiling policies followed by credit rating agencies. We find that sovereign downgrades lead to greater increases in the cost of debt and greater decreases in investment and leverage of firms that are at the sovereign bound relative to similar firms that are below the bound. Our findings suggest that public debt management generates negative externalities for the private sector and real economic activity.

The Effect of BAD Taxes on the Financing and Investment Decisions of Private Firms in
Colombia, Working Paper

I investigate the impact of the introduction and changes of bank account debit taxes (BAD taxes) on the financing and investment decisions of a large sample of private firms in Colombia. I first document that after the implementation of BAD taxes, bank leverage decreases from an average of 23% in the years before the tax to 18% in the post-tax years. Furthermore, using a differences-in-differences empirical strategy, I find that following the introduction of BAD taxes, small-risky firms reduce their leverage more relative to large-high credit quality firms, even after controlling for firms’ demand characteristics. This effect is statistically and economically significant: a 0.1% increase in the BAD tax rate implies that small-risky firms reduce their bank leverage relative to larger-less risky firms by 1.7% more. I also find evidence indicating that following the introduction of bank debit taxes, firms with lower credit quality decrease more their capital expenditures relative to better credit quality firms.